LawFlash

In our first of three LawFlashes about the recent contract law reform in France, we discuss the changes to contractual nonperformance.

Entered into force for contracts concluded after 1 October 2016, Ordinance No. 2016-131 of 10 February 2016 Reforming Contract Law, the General Regime and Rules of Evidence (the Ordinance) amended the provisions relating to contractual nonperformance and lists, in new articles 1217 to 1231-7 of the Civil Code, and the options available to a co-contractor affected by contractual nonperformance, namely, the following:

Plea of nonperformance (1)

Specific performance (2)

Reduction of the price (3)

Rescission (4)

The Ordinance also introduces new features in terms of compensation for a loss that resulted from contractual nonperformance (5).

1.Plea of Nonperformance (new art. 1219 and 1220 of the Civil Code)

A party is entitled not to perform its obligation

if the other co-contractor has not performed its obligation, provided that the nonperformance is sufficiently serious or

if, prior to the start of performance, it clearly appears that the other co-contractor will be unable to perform its obligation and the consequences for such nonperformance are sufficiently serious. In such case, this suspension must be notified to the other party as soon as possible.

The risk attached to a plea is borne by the party invoking the same, whose liability may be incurred in case of abuse.

2. Specific Performance (new art. 1221 and 1222 of the Civil Code)

Except for cases where an obligation is of a personal nature (intuitu personae), a creditor may, subject to a prior formal notice, request specific performance of the obligation. This option is only available when such performance is legally and materially feasible and does not entail a clear disproportion between its cost to the debtor and its interest for the creditor (new article 1221).

New article 1222 of the Civil Code also offers an alternative to specific performance by allowing the creditor, subject to a prior formal notice served on the debtor (i.e., without referring the matter to the judge) to request performance of the obligation itself within a reasonable period and at a reasonable cost. In contrast, the creditor must seek the judge’s authorization to cancel what has been done to breach the obligation.

The creditor may also request the court to sentence the debtor to (i) advance the amounts necessary for the performance or cancellation or (ii) repay the sums advanced for that purpose.

3. Price Reduction (new art. 1223 of the Civil Code)

It is now possible for a creditor, subject to a prior formal notice on the debtor, to accept an incomplete performance of the contract and request a proportional price reduction.

4. Rescission (new art. 1224 to 1230 of the Civil Code)

There are two possible causes to rescission.

The existence of a termination clause that automatically applies if the contractual clauses have been complied with. This clause must specifically identify the undertakings whose nonperformance will lead to the contract’s termination. Contract termination may occur only after a notice to perform is served that mentions the termination clause, unless the parties agreed that termination may arise from the mere act of nonperformance. Termination takes effect on the date indicated in the clause (new articles 1224 and 1225).

Although rescission may still be sought before a court (new article 1227), a party may now request it without referring to a judge beforehand where “the nonperformance is sufficiently serious”. In such an event, the creditor may, at its own risk, rescind the contract by simple notification (new articles 1224 and 1226). Except for in the case of an emergency, the creditor must first serve notice to the debtor to perform the obligation within a reasonable period and inform the creditor that it has a right of rescission. If the nonperformance persists, the creditor shall notify the debtor of the rescission along with the reasons on which it is based. The rescission takes effect once the debtor receives such notice, and the debtor may, at any time, challenge the rescission before the judge (the seriousness of the nonperformance’s burden of proof rests in such case on the party that initiated the rescission).

The judge may, according to the specific situation, acknowledge or order the rescission, grant an extension of time to perform the contract, or award damages to the party affected by the rescission if the nonperformance is not sufficiently serious (new article 1228). In such case, the rescission will take effect on the date set by the judge or, failing this, the date of the summons.

Because the rescission ends the contract, the following restitution terms are provided for in new article 1229 of the Civil Code:

“Where the goods or services exchanged could only prove useful through the full performance of the rescinded contract, the parties must return all the items they have provided to each other.”

“Where the goods or services exchanged proved useful as and when the contract was reciprocally performed, there is no need to return such items for the period before the last good or service that has not received consideration; in such case, the rescission is qualified as a termination.”

Of course, some clauses (dispute resolutions, noncompete clauses, and confidentiality clauses) are not affected by a contract’s rescission (new article 1230).

5. Compensation for Loss as a Result of Contractual Nonperformance (new art. 1231 to 1231-7 of the Civil Code)

Damages may supplement the measures set forth above. The principles for compensation for loss as a result of contractual nonperformance are taken over from the former provisions of the Civil Code and adapted according to the standards derived from case law.

Therefore, it is necessary for the formal notice to grant the debtor a reasonable time period to perform its obligation before claiming damages, unless the nonperformance is definitive (new article 1231).

Unsurprisingly, as was already the case before the Ordinance, damages are designated as the loss that the creditor has [...] sustained and the profit of which it has been deprived (new article 1231-2). The repairable damages are those that were foreseen or foreseeable at the time of entering into the contract, except in case of serious misconduct or gross negligence, but always within the limit of what immediately and directly ensues from the nonperformance (new articles 1231-3 and 1231-4).

Former articles 1152 and 1231 are now compiled in new article 1231-5, which confers on the judge a broad discretionary power for any penalty clause relating to contract nonperformance. Therefore, the judge may revise upward, downward, or take into consideration a contract’s partial nonperformance. Further, except for in a case of definitive nonperformance, notice must be served to the debtor prior to the performance of the penalty clause.

Finally, the exclusionary nature of force majeure is confirmed, insofar as it is defined as “an event outside the debtor’s control that could not be reasonably foreseen at the time of entering into the contract” (new article 1218). Specifically,

if the prevention is temporary, then the performance is suspended, and

if the prevention is definitive, then the contract is rescinded and the parties are exempted from performance thereof.

Contacts

If you have any questions or would like more information on the issues discussed in this LawFlash, please contact any of the following Morgan Lewis lawyers: